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The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design

Theory tells us that the lawyers who draft standard-form contracts will respond to an erroneous court interpretation of a boilerplate contract term by revising the standard formulation of the clause or otherwise clarifying the ambiguity. This is so because lawyers, it is assumed, have the incentive to protect clients from the risk that other courts may adopt the disfavored interpretation or that the apparent ambiguity will, in any event, produce future costly litigation. As many scholars have observed, the reality is often different. Boilerplate terms in standard contracts are sticky. Many of the theories explaining why standard contract terms are resistant to innovation focus on the efficiency benefits of market-wide standardization. Others look to economic or psychological factors that deter the production of innovative terms. In this book, we use both qualitative and quantitative data to explore the reasons for the phenomenon of stickiness in sovereign bond contracts. We focus on a novel judicial interpretation of an obscure clause in cross-border financial contracts – the pari passu clause – that rattled the chandeliers of international finance. One might have expected the practicing bar to quickly clarify their forms before the heresy could spread and gain traction. But that didn’t happen. In over 90% of the contracts subsequently issued, no attempt was made to clarify the imprecise language of the clause. None of the extant theories of stickiness explain what we find. Rather, the story that emerges is about the modern big law firm: the financial pressure on big firms to maintain a high volume of transactions contributes to an array of conflicts that that deter innovation and are largely hidden from the individual lawyers charged with drafting responsibility – conflicts that are hidden in part by the myths that the members of this legal community collectively tell themselves about the origins of boilerplate terms whose meaning has been lost in time.